Meet Mr Freeserve

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The Independent Online
At Dixons, the board has faced an enviable quandary. How to reward an employee whose pet project is about to go public after less than a year with a likely stock market valuation of more than pounds 1bn. John Pluthero, the 35-year-old chief executive of Freeserve, the no-subscription Internet service launched last September by the electrical retailer, is uncharacteristically coy on the subject.

Come on John, are you the next Internet millionaire? That brings a laugh. "I don't think so.'' Surely Dixons has given him a pay rise since Freeserve confounded all forecasts by signing up 1.25 million customers, making it the UK's biggest Internet access business? Well, sort of, but that was because, just as Freeserve was launched, Mr Pluthero took on the running of Dixons' distribution and aftersales arm. At that point, no one imagined that heading Freeserve would be a full-time job.

Mr Pluthero is now at Freeserve 12 hours a day. He admits a lucrative new package of salary and share options will finally kick-in with next month's demerger of Freeserve, "but not the kind that US Internet CEOs are on". Before the flotation prospectus, Mr Pluthero declines to talk numbers.

Valuing Freeserve itself is much harder. More than 18 per cent of the business is to be sold to financial institutions worldwide and to the UK public. Marketing to the City starts next week. Following the recent transatlantic bout of nerves about unrealistic Internet share prices, analysts' estimates of Freeserve's worth have ranged hugely from pounds 500m to more than pounds 2bn. But even at the bottom end of the spectrum, Dixons can hardly complain: it has spent only pounds 1m or so getting Freeserve up and running, and the loss-making business's revenues until 1 May were just pounds 2.73m.

Dixons' chairman, Sir Stanley Kalms, must be pleased with the Freeserve boss. "We are not an organisation which stops too long to pat ourselves on the back,'' says Mr Pluthero, approvingly. "I don't think to this day they have actually stopped and said, well done. We don't feel bad about that. We've been running the business.''

This 6ft 2in Essex man who was determined to break the mould of Internet usage in the UK is no would-be Silicon Valley geek. Last summer, as he sat in his Dixons office plotting to bring Internet accounts to the masses, Mr Pluthero did not even have e-mail on his home computer. (His first home e-mail account came with Freeserve last September.) Nor did it occur to him to pile into US Internet shares when they were cheap, despite his all-consuming conviction about the profit potential of cyberspace. "I don't own a single share outside of Dixons,'' he says with a shrug.

Mr Pluthero's focus was closer to Britain. "What we wanted to do was to achieve some step change in the market place, and become the biggest player and Internet access point for the UK,'' he says. And that is what happened, with the launch of Britain's first major free Internet service provider (ISP). David Pringle, at the IT consultants Yankee Group Europe, says: "They completely reinvented the industry, and turned the concept of Internet access on its head.''

But in a fast-changing and unpredictable industry, there is a world of difference between shaking up the sector and making long-term money out of the new ISP world order. Copy-cat free Internet providers have leapt into the market after Freeserve, including BT, Virgin, Tesco, WH Smith and Dell. Across the Channel in France, the electrical retailer Darty, owned by Britain's Kingfisher group, two months ago took a leaf out of Dixons' book and launched its own free ISP, Libertysurf. Perhaps the biggest compliment - and current threat - to Freeserve is America Online's (AOL) plan for a new no-subscription service in the UK.

All this upheaval can be traced back to a few sums scribbled last summer on a red Great North Eastern Railways' napkin. Since 1994, Mr Pluthero had been mulling over how Dixons could develop its Internet-related business. "I was unconvinced we should just have a website and sell TVs. I felt there was an opportunity for us to have a genuine Internet business.'' At the end of 1997, Mr Pluthero and a Dixons colleague, Mark Danby, (now Freeserve's chief operating officer), began talking to Planet Online, an Internet connection company, about a low-cost subscription-based ISP service. "No one was getting very excited about that, because we were going to have, say, 50,000 subscribers,'' says Mr Pluthero.

He wanted something more dramatic. "Mark and I were working away on it, and a number of our colleagues, it has to be said, were a little mocking of our efforts. Mark and I would get very excited about what we could achieve. We were seeing what was happening to AOL and others in the US, the huge market valuations. We kept coming into work in the morning and saying, `We're going to create this huge thing'.''

Peter Wilkinson, the 45-year-old Yorkshire managing director and part- owner of Planet Online, was working with them. In late July last year, he was studying call-rates. "I thought, `This is crazy, we can actually do this by going free'.'' On a train from York to London, he re-did his calculations on that red napkin. "You're dealing with millions of micro- pennies, and I never even got maths O level," he says. "I wanted to check it. I wrote all the formulas on the napkin.'' The key to the scheme would be persuading a telecoms carrier to part with a slice of the call revenues generated by the high volumes from Internet users.

That same day, Mr Wilkinson walked into Mr Pluthero's office. "I pulled out the napkin and he got really excited,'' says Mr Wilkinson. "He started quivering - it was really quite good to watch. And I was excited too.'' That napkin - an unlikely corporate relic - is now tucked away in Mr Wilkinson's 1998 desk diary.

Under the deal, Energis, the telecoms carrier spun off from the National Grid, agreed to carry Freeserve's long-distance network traffic, and to hand back an unspecified slice of this revenue. Planet Online, sold to Energis in August 1998, provided the modem links to the Web. Mr Pluthero started to push content providers, such as the Press Association, to deliver cheap material for the Freeserve site.

The Planet Online sale negotiations assumed that to the end of March 1999, Freeserve would cumulatively clock up 300 million minutes of online connections. In reality, by Christmas, it was doing 100 million minutes a week. "We were so far out with our forecasts,'' says Mr Wilkinson. Perhaps Mr Pluthero now wishes he had set up Freeserve by himself? "Freeserve is not the sort of business which two guys in a back bedroom could have started," says the CEO. "If Mark [Danby] and I had rolled up at Energis and tried to sell them the same story, it would not have happened.''

So was it simply a case of being in the right place at the right time? "There was obviously a lot of luck in the timing. If we'd tried to do it a year earlier it would not have happened - content was too expensive, telephone companies were not prepared to pay that slice of their revenue.''

Credit is given all round. Mr Wilkinson says: "I came up with a way of doing it. John has taken my concept and he is the one who has really made it physically happen.''

Despite Mr Pluthero's surname, possibly of Spanish origin, he was born and raised in Essex, where his father was a publican. At Colchester Royal Grammar School he showed no early signs of nerd-dom. "I was very sporty at school, I was your average sports jock - county rugby, cricket. In the summer, I barely saw a school lesson.'' Even so, he won a place at the LSE to read economics. "When I went to university, one of the things I was worried about was that I'd done so much sport. My two Bs and a C [at A level] was what the LSE required, but I thought I could do better. So I went to university with the intention of doing well. And I got a First.''

Did he exhibit any radical tendencies during his stay? "When I arrived, one of the disappointments was that the Lib-Dems held sway in the student union,'' he says. "I'm not at all interested in politics, but we used to go and cause suitable havoc.''

After university, he joined Coopers & Lybrand as a consultant to qualify as an accountant. "Consultancy was fun and glamorous, but it struck me, not as a con, but not that satisfying. You would roll up, give advice to a company, advice the company was often capable of providing itself. Then you would tend to disappear. I rather liked the idea of actually making something happen.'' So after three years, he joined P&O, ending up as a director of Chelsea Harbour, its flagship development on the Thames.

Then it was an unfulfilling year at Bass's head office. So when the headhunters called about a post at Dixons, he was eager to listen.

"I had an interview with the then financial director of about 30 to 40 minutes. He told me to pop upstairs to see the group human resources director. By the time I got there, he had phoned upstairs and said, `Offer the guy a job'. And it has been that pace ever since.'' He was on the fast-track, working on corporate strategy and acquisitions.

In the hard-nosed atmosphere of Dixons, Mr Pluthero has maintained his deadpan humour. What do his friends think of his sudden rise to fame? "I must talk to them at some stage,'' he says.

Peter Wilkinson says. "He's very dry, takes a bit of warming up. He's a bright lad, he picks things up quickly. I would offer the bloke a job.''

For the moment, Mr Pluthero is busy

on the share flotation merry-go-round - endless City presentations and courting the media. "I'm very proud of what Freeserve is, and what we have achieved," he says. "I have no problem standing up and telling people that.'' Freeserve claims 57 per cent of its 1.25 million active users have logged on in the previous three days. Fletcher Research's most recent survey of 40,000 UK net users found Freeserve topped the list with 31 per cent of those online.

That is the sales pitch, but there is also scepticism over whether the Freeserve formula really adds up to a business which aspires to be worth more than pounds 1bn. A humorous look by Fletcher at the rationale behind possible valuations settled on a range from pounds 100m to pounds 4bn. Neil Bradford, a Fletcher director, says: "The big thing that's is almost impossible to quantify is the whole business of being first, which gives Freeserve the ability to shape the market." He believes Freeserve does have the critical mass. "Everyone has got to be talking to Freeserve. If you are a bookstore or any kind of service, you have to be talking to these guys."

Critical mass matters, because, without subscriptions, an ISP's potential for significant earnings depends on online advertising and commissions from e-commerce transactions through its site.

There lies the challenge for Freeserve, and the risk for would-be investors. Mr Pluthero says: "What you have got to do is turn all those users into customers. You have got to get them to enjoy your service, to stay online, so you can earn advertising revenue. You need to get them to spend money by offering them good deals and good value on the e-commerce operations.''

The company's data show that in May, Freeserve members called up 64 million page views, of which 28 million related to sites provided by its content providers. The rest used Freeserve's free access as a springboard on to the wider Web. Freeserve aims to launch a raft of new pages and services to improve its hold on fickle users.

The greatest uncertainty is the likelihood of another big shift in the structure of the industry. Internet access delivery and telephone regulatory regimes are in transition.

At some stage, the UK could opt for an American-style flat-rate charging structure for local phone calls. Or BT and the cable companies could offer flat-rate charges simply for Internet access, at a stroke removing the slice of connection revenues which made free ISPs possible in the first place. Even without such a radical change, rivals are trying to devise new business models to lure customers. BT has already offered no-call- charge weekend Internet access on its subscription ISP service.

All the boundaries are blurring. Freeserve is itself involved in an Internet telephony venture, a technology which uses the Internet to carry telephone traffic. In the future, everyone will be on everyone else's patch.

But where will Mr Pluthero be? What will the 35-year-old do for an encore? Maybe in five years he will no longer be at Freeserve? "Oh yes, I will," he says. "I intend to make it the biggest thing I ever do in business.''